Maybe you can’t marshal billions of dollars and a network of former corporate executives to push for change at a company. But if “activist” fits your personality, you can still look for situations as an activist would.
Typically, the activist playbook focuses on a few kinds of situations. The most prominent of them is agitating for—or against—a deal.
Take what happened to medical-device maker HeartWare International. The activist fund Engaged Capital opposed HeartWare’s proposed acquisition of Valtech in 2015. The stock was at $51 when Engaged disclosed its stake and suggested management consider strategic alternatives. The stock fell to $25 in January 2016, but in June of that year Medtronic (MDT) announced that it would acquire HeartWare for $58 a share, or about four times revenue.
The episode shows that even for the small investor, it can be useful to think of a stock in terms of acquisition potential. HeartWare was never profitable, but synergies in the medical industry can be substantial. Large drug and device companies can add new products for a sales force. That generates substantial operating leverage—the same sales rep sells more stuff.
Operational improvement is also where activists are, well, active.
Activists talk about cash conversion—the time it takes for a product sale to turn into cash—and asset turnover, the amount of sales generated by an asset. They also examine inventories to make sure they aren’t growing faster than sales. And they look at administrative costs.
For operational efficiency, companies are often compared within their industries. If looking at General Mills (GIS), one could note that Campbell Soup ’s (CPB) operating margins are 5.4%, while General Mills’ are 16%.
Is there an opportunity at Campbell? Activist investor Dan Loeb seems to think so.
Small investors won’t get a board seat as Loeb has, but they can still look for operational outliers.
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